xQUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For
the quarterly period ended December 31, 2006.

oTRANSITION
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934

Commission
File Number 333-131536

MUELLER WATER PRODUCTS, INC.

(Exact name of registrant
as specified in its charter)

Delaware

20-3547095

(State or other
jurisdiction of

(I.R.S. Employer

incorporation or
organization)

identification
No.)

1200 Abernathy Road
Atlanta, GA 30328

(Address of principal
executive offices)

(770) 206-4200

(Registrants telephone
number, including area code)

Indicate by check mark
whether the Registrant (1) has filed all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes x No o

Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of accelerated
filer and large accelerated filer in Rule 12b-2 of the Exchange
Act.

Large Accelerated Filer o

Accelerated Filer o

Non-accelerated Filer x

Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2
of the Act). o Yes x No

The
Registrants voting stock was privately held as of March 31, 2006. There
were 114,626,155 shares of common stock of the Registrant outstanding as of February 9,
2007, composed of 28,781,235 shares of Series A common stock and
85,844,920 shares of Series B common stock.

Adjustments to reconcile net income (loss) to net
cash provided by operating activities:

Depreciation

17.3

17.2

Amortization of
intangibles

7.1

6.6

Amortization of deferred
financing fees

0.7

1.2

Accretion on debt

2.7

3.3

Share-based compensation
expense

2.5



Impairments of property,
plant and equipment



19.2

Credit for deferred
income taxes

(1.8

)

(25.8

)

Other, net

(1.5

)

(0.8

)

Changes in assets and liabilities, net of the effects
of acquisitions:

Receivables

72.2

28.9

Inventories

(38.0

)

91.2

Prepaid expenses

(2.2

)

1.0

Other non-current assets

0.3



Pension and other
long-term liabilities



(4.4

)

Accounts payable

(28.6

)

(0.8

)

Accrued expenses and
other current liabilities

(23.8

)

(13.1

)

Net cash provided by
operating activities

23.9

74.9

Investing Activities

Additions to property,
plant and equipment

(20.0

)

(16.0

)

Decrease in amounts due
to Walter



(20.0

)

Net cash used in
investing activities

(20.0

)

(36.0

)

Financing Activities

(Decrease) increase in
dollar value of bank checks outstanding

(10.0

)

0.6

Proceeds from short-term
borrowings



55.9

Retirement of short-term
debt



(55.9

)

Proceeds from long-term
debt



1,050.0

Retirement of long-term
debt

(2.2

)

(615.3

)

Payment of deferred
financing fees



(21.6

)

Dividend to shareholders

(2.0

)

(444.5

)

Dividend to Walter for
acquisition costs



(12.0

)

Walter contribution of
Predecessor Muellers cash



76.3

Net cash (used in)
provided by financing activities

(14.2

)

33.5

Effect of exchange rate
changes on cash

0.4



Net (decrease) increase
in cash and cash equivalents

(9.9

)

72.4

Cash and cash equivalents
at beginning of period

81.4



Cash and cash equivalents at end of period

$

71.5

$

72.4

Schedule
of non-cash investing and financing activities:

On October 3, 2005, the Companys former parent,
Walter Industries, Inc., purchased all the outstanding common stock of
Predecessor Mueller.

(dollars in millions)

Contribution of
Predecessor Mueller by Walter

$

932.9

Less: Cash of Predecessor
Mueller received

(76.3

)

Total net assets received excluding cash

$

856.6

Subsequent to the Acquisition, the Companys former
parent, Walter Industries, Inc., forgave an intercompany receivable with
U.S. Pipe of $443.6 million.

The accompanying notes are an integral part of the condensed consolidated financial statements.

4

MUELLER WATER
PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE THREE MONTHS ENDED DECEMBER 31, 2006 AND 2005
(UNAUDITED)

Note 1. Organization

The registrant is Mueller Water Products, Inc., a
Delaware corporation (Mueller Water or the Company). The Company is the
surviving corporation of the merger on February 2, 2006 of Mueller Water
Products, LLC (Commission File Number: 333-116590) and Mueller Water
Products Co-Issuer, Inc. with and into Mueller Holding Company, Inc.,
a Delaware corporation. On June 1, 2006, Mueller Water completed its
initial public offering of its Series A common stock (NYSE: MWA). On December 14,
2006, Walter Industries, Inc. (Walter), a diversified New York Stock
Exchange traded company (NYSE:WLT), distributed all of the Companys
outstanding Series B common stock (NYSE: MWA.B) to its shareholders.

On October 3, 2005, through a series of
transactions (the Acquisition), Walter, through a wholly-owned subsidiary,
acquired all outstanding shares of capital stock of Mueller Water Products, Inc.
(Predecessor Mueller), which immediately was converted into Mueller Water
Products, LLC, a Delaware limited liability company, and contributed United
States Pipe and Foundry Company, LLC, (U.S. Pipe), owned by Walter since
1969, to the acquired company. The results of operations of Predecessor Mueller
are included in the Condensed Consolidated Statements of Operations beginning October 3,
2005.

The Company was originally organized as United States
Pipe and Foundry Company, Inc. (Inc.) and was a wholly owned subsidiary
of Walter. On September 23, 2005, Inc. was dissolved and United
States Pipe and Foundry Company, LLC was organized in the state of Alabama, and
the operations of Inc. were conducted under the form of a limited liability
company. The Company has three operating segments, which are named after its
leading brands in each segment: Mueller Co., U.S. Pipe, and Anvil.

The consolidated financial
statements are prepared in conformity with accounting principles generally
accepted in the United States of America, which require management to make
certain estimates and assumptions that affect the reported amounts of assets,
liabilities, sales and expenses for the reporting periods. Actual results could
differ from those estimates. All significant intercompany balances and
transactions have been eliminated. In the opinion of management, all normal and
recurring adjustments that are considered necessary for a fair financial
statement presentation have been made. The condensed balance sheet data as of September 30,
2006 was derived from audited financial statements, but does not include all
disclosures required by accounting principles generally accepted in the United
States of America.

Note 2. Related
Party Transactions

Related
Party TransactionsThe Company purchases foundry coke
from Sloss Industries, Inc., which was an affiliate until December 14,
2006, for an amount that approximates the market value of comparable
transactions. Costs included in cost of sales related to purchases from Sloss
Industries, Inc. were $4.5 million and $5.4 million for the
three months ended December 31, 2006 and 2005, respectively.

Other services that Sloss Industries, Inc.
provides to the Company include the delivery of electrical power to one of the
Companys facilities, rail car switching and the leasing of a distribution
facility. The total of these other services included in the Companys operating
expenses were $0.3 million and $0.4 million for the three months ended December 31,
2006 and 2005, respectively.

5

Related
Party AllocationsCertain
costs incurred by Walter such as insurance, executive salaries, professional
service fees, human resources, transportation, healthcare and other centralized
business functions were allocated to its subsidiaries. Certain costs that were
considered directly related to the U.S. Pipe segment were charged to the
Company and included in selling, general and administrative expenses. These
costs were approximately $0.5 million for the three months ended December 31,
2006 and 2005. Costs incurred by Walter that cannot be directly attributed to
its subsidiaries were allocated to them based on estimated annual revenues.
Such costs were allocated to the Company and are recorded in the caption
related party corporate charges in the accompanying Condensed Consolidated
Statements of Operations and were approximately $1.6 million and
$1.8 million for the three months ended December 31, 2006 and 2005,
respectively. While the Company considers the allocation of such costs to be
reasonable, the cost of performing such services on its own behalf may be
higher or lower than historically allocated amounts.

Certain of the Companys
employees had been granted Walter restricted stock units and stock options
under Walters share-based compensation plans. See Note 5 for additional
information. The Company has expensed $0.5 million related to the
share-based compensation costs allocated from Walter for the three months ended
December 31, 2006, and had no such expenses for the three months ended December 31,
2005.

Note 3. Acquisition
of Predecessor Mueller by Walter

On October 3, 2005, pursuant to the agreement
dated June 17, 2005, Walter acquired all of the outstanding common stock
of Predecessor Mueller for $944.0 million and assumed $1.05 billion of
indebtedness. Predecessor Mueller was converted into a limited liability
company on October 3, 2005 and was merged with and into the Company on February 2,
2006. In conjunction with the acquisition, U.S. Pipe was contributed in a
series of transactions to Mueller Group, LLC (Mueller Group or Group), a
wholly-owned subsidiary of the Company, on October 3, 2005. On February 23,
2006, Walter received $10.5 million based on the final closing cash and working
capital, adjusting the purchase price to $933.5 million.

Walters
acquisition of Predecessor Mueller has been accounted for as a business
combination with U.S. Pipe considered the acquirer for accounting purposes. The
total purchase price is comprised of (dollars in millions):

Acquisition of
the outstanding common stock of Predecessor Mueller

$

918.1

Acquisition-related
transaction costs

15.4

Total purchase
price

$

933.5

Acquisition-related transaction costs include
investment banking, legal and accounting fees and other external costs directly
related to the Acquisition.

6

The
excess of the purchase price over the net tangible and identifiable intangible
assets is recorded as goodwill. Based on current fair values, the purchase
price was allocated as follows (dollars in millions):

Receivables, net

$

177.4

Inventory

373.2

Property, plant
and equipment

214.2

Identifiable
intangible assets

856.9

Goodwill

801.7

Net other assets

350.7

Net deferred tax
liabilities

(267.9

)

Debt

(1,572.7

)

Total purchase
price allocation

$

933.5

Note 4. Facility
Rationalization, Restructuring and Related Costs

On October 26, 2005, Walter announced plans to
close U.S. Pipes Chattanooga, Tennessee plant and transfer the valve and hydrant
production of that plant to Mueller Co.s Chattanooga, Tennessee and
Albertville, Alabama plants. The plant closed in 2006, resulting in the
termination of approximately 340 employees. Exit costs totaled $49.9 million of
which approximately $28.6 million was related to severance and fixed asset
write-offs and qualified as restructuring and impairment charges. The remaining
exit costs of $21.3 million were comprised of an inventory write-down totaling
$11.4 million, a $9.0 million write-off of unabsorbed overhead costs, and $0.9
million of other related costs, which were recognized in cost of sales during
the year ended September 30, 2006. During the quarter ended December 31,
2006, the Company paid $0.3 million of the above-mentioned severance.

On January 26, 2006, the Company announced the
closure of the Henry Pratt valve manufacturing facility in Dixon, Illinois,
which is included in the Companys Mueller Co. segment. The eventual closure of
the facility is expected to occur in fiscal year 2007, resulting in the
termination of approximately 100 employees. Total estimated costs related to
this closure are $3.7 million, including termination benefits of $1.0 million
and property impairment charges of $1.7 million, which were recorded as
adjustments to goodwill in the year ended September 30, 2006. These
restructuring costs were recorded to goodwill as the overall plan to close the
facility was identified prior to the Acquisition. The remaining estimated costs
of $1.0 million are for the transfer and installation of equipment and
temporary outsourcing of manufacturing and will be expensed when incurred. During
the quarter ended December 31, 2006, the Company paid $0.4 million of the
above-mentioned severance.

On November 18, 2006, the Company announced the
relocation of pipe nipple and merchant coupling production in the Canvil
manufacturing facility in Ontario, Canada to the Beck facility in Pennsylvania,
both of which are included in the Companys Anvil segment. The eventual closure
of the lines is expected to occur in fiscal year 2007, resulting in the
termination of approximately 60 employees. Termination benefits of $1.8 million
were recorded as adjustments to goodwill in the year ended September 30,
2006. These restructuring costs were recorded to goodwill as the overall plan
to close the facility was identified prior to the Acquisition. During the
quarter ended December 31, 2006, the Company revised its severance
estimate, and decreased the goodwill balance and accrued severance by $0.4
million.

7

Activity
in accrued restructuring for the three months ended December 31, 2006 was
as follows (dollars in millions):

Beginning balance

$

5.3

Adjustment to
accruals allocated to goodwill for plant closures identified prior to the
Acquisition

(0.4

)

Payments

(0.7

)

Ending balance

$

4.2

Note 5.Share-Based
Compensation Plans

Certain
of the Companys employees had been granted Walter restricted stock units and
stock options under Walters share-based compensation plans. The Company has
expensed $0.5 million related to the share-based compensation costs allocated
from Walter for the three months ended December 31, 2006. In connection
with Walters distribution of all of the Companys Series B common stock
to its shareholders on December 14, 2006, Walter cancelled these
instruments and the Company replaced them with restricted stock units and
options to acquire the Companys Series A common shares. These equity
awards were designed to provide intrinsic value and terms equal to the Walter
cancelled instruments as follows:

Number of
instruments

Range of exercise
prices

Weighted
average
exercise price

Total
compensation

(millions)

(dollars in millions)

Restricted stock
units

0.4



$

14.95

$

2.2

Traditional stock
options

0.5

$

2.05  20.56

13.45

0.5

0.9

$

2.7

The
Company also granted stock options and restricted stock units separately during
the three months ended December 31, 2006 as follows:

Number of
instruments

Weighted
average fair
value per
instrument

Total
compensation

(millions)

(dollars in millions)

Restricted stock
units

0.4

$

15.09

$

6.7

Traditional stock
options

0.3

5.90

1.7

Employee stock
purchase plan options



3.75

0.1

0.7

$

8.5

As of December 31, 2006, there was approximately $26.5 million of
unrecognized compensation cost related to non-vested share-based compensation
arrangements granted under the 2006 Plan, including the Walter replacement
instruments described above.

8

Note 6. Borrowing
Arrangements

Long-Term DebtLong-termdebt
consists of the following obligations:

December 31,
2006

September 30,
2006

(dollars in millions)

2005 Mueller
credit agreement

$

791.8

$

793.8

Senior
subordinated notes

214.6

215.1

Senior discount
notes

119.4

116.3

Capital lease
obligations

2.0

2.1

1,127.8

1,127.3

Less current
portion

(9.0

)

(9.0

)

$

1,118.8

$

1,118.3

2005
Mueller Credit Agreement:On October 3,
2005, Group entered into a credit agreement (the 2005 Mueller Credit Agreement)
consisting of a $145 million senior secured revolving credit facility maturing
in October 2010 (the 2005 Mueller Revolving Credit Facility) and a
$1,050 million senior secured term loan maturing in October 2012 (the 2005
Mueller Term Loan). The commitment fee on the unused portion of the 2005
Mueller Revolving Credit Facility is 0.375% and the interest rate is a floating
interest rate of 1.75% over LIBOR. The 2005 Mueller Term Loan carries a
floating interest rate of 2.0% over LIBOR.

Senior
Subordinated Notes: In April 2004, Group
issued $315.0 million principal face amount of senior subordinated notes due
2012. The notes were recorded at fair value in connection with the Acquisition,
resulting in an effective interest rate of 9.2%.

Senior Discount Notes: In
April 2004, Predecessor Mueller issued $223.0 million principal face
amount of senior discount notes due 2014. The notes were recorded at fair value
in connection with the Acquisition, resulting in an effective interest rate of
12.1%.

Note 7. Derivative
Financial Instruments

Interest
Rate SwapsTheCompany uses interest rate swap
contracts with a cumulative total notional amount of $425 million to hedge
against cash-flow variability arising from changes in LIBOR rates in
conjunction with its LIBOR-indexed variable rate borrowings. The Company
recorded an unrealized gain from its swap contracts, net of tax, of $0.9
million at December 31, 2006 in accumulated other comprehensive income. These
swaps have a fair value of $1.5 million at December 31, 2006, which is
included in other long-term assets in the accompanying Condensed Consolidated Balance
Sheet.

Forward
Foreign Currency Exchange ContractsTheCompany uses
Canadian dollar forward exchange contracts with a cumulative notional amount of
$29.4 million to hedge against cash-flow variability arising from changes in
the Canadian dollar-U.S. dollar exchange rate in connection with anticipated
transactions, primarily inventory purchases denominated in Canadian dollars. The
Company recorded an unrealized gain of $0.4 million, net of tax, from its
forward exchange contracts at December 31, 2006. These forwards have a
fair value of $0.7 million at December 31, 2006, which is included in
other long-term assets in the accompanying Condensed Consolidated Balance Sheet.

Natural
Gas SwapsThe Company uses natural gas swap
contracts with a cumulative total notional amount of approximately 600,000
mmbtu to hedge against cash-flow variability arising from changes in natural
gas prices on the NYMEX exchange in conjunction with its anticipated purchases
of natural gas. The Company recorded an unrealized loss from its swap contracts,
net of tax, of $0.3 million at December 31, 2006 in accumulated other
comprehensive income. These swaps have a
negative fair value

9

of $0.6 million at December 31,
2006, which is included in other liabilities in the accompanying Condensed Consolidated
Balance Sheet.

On January 8, 2007,
the Company entered into additional natural gas swap contracts. These contracts
fix the Companys purchase price for natural gas at prices ranging from $6.67
to $7.10 per mmbtu for a total purchased volume approximately 300,000 mmbtu
over the eight months ending September 30, 2007.

Note 8. Pension and Other Post-employment
Benefits

The components of net
periodic benefit cost for pension and post-employment benefits for the three
months ended December 31, 2006 and December 31, 2005 are as follows:

Pension Benefits

Other Benefits

Three months
ended December 31,

Three months
ended December 31,

2006

2005

2006

2005

(dollars in millions)

Components of net periodic benefit cost

Service cost

$

1.6

$

2.0

$

0.1

$

0.2

Interest cost

5.1

4.7

0.3

0.3

Expected return
on plan assets

(5.9

)

(4.9

)





Amortization of
prior service cost

0.1

0.1

(0.6

)

(0.6

)

Amortization of
net loss (gain)

0.5

1.9

(0.4

)

(0.2

)

Curtailment
settlement loss









Net periodic benefit
cost

$

1.4

$

3.8

$

(0.6

)

$

(0.3

)

For the three months ended
December 31, 2006, the Company had no contributions to its pension plans.
The Company presently anticipates contributing approximately $7.7 million
to fund its pension plans and $2.0 million to its other post-employment benefit
plan in fiscal 2007, and may make further discretionary payments.

Note 9.Supplementary
Balance Sheet Information

Selected
supplementary balance sheet information is presented below:

December 31,
2006

September 30,
2006

(dollars in millions)

Inventories

Purchased materials and manufactured parts

$

69.6

$

66.7

Work in process

134.5

127.7

Finished goods

287.4

260.2

$

491.5

$

454.6

10

December 31,
2006

September 30,
2006

(dollars in millions)

Property, plant and equipment

Land

$

28.6

$

28.4

Buildings

84.2

83.4

Machinery and equipment

499.2

489.9

Other

51.2

46.4

663.2

648.1

Accumulated depreciation

(324.4

)

(311.1

)

$

338.8

$

337.0

December 31,
2006

September 30,
2006

(dollars in millions)

Accrued expenses and other
liabilities

Vacations and holidays

$

13.4

$

13.6

Workers compensation

5.9

6.0

Accrued payroll and bonus

7.6

23.5

Accrued sales commissions

3.7

5.0

Accrued other taxes

5.2

7.7

Accrued warranty claims

2.9

2.7

Accrued environmental claims



2.5

Accrued cash discounts and rebates

26.5

22.1

Accrued interest

9.9

13.6

Accrued restructuring

4.2

5.3

Accrued medical

3.9

3.7

Other

9.4

10.6

$

92.6

$

116.3

Note 10. Supplementary
Income Statement Information

The
components of interest expense, net of interest income are presented below:

Three months ended
December 31,

2006

2005

(dollars in millions)

Interest expense, net of
interest income

Contractual interest expense

$

21.8

$

29.2

Deferred financing fee amortization

0.7

1.2

Write-off of bridge loan commitment fees



2.5

Interest rate swap gains

(0.9

)

(0.4

)

Interest expense

21.6

32.5

Interest income

(1.2

)

(0.3

)

$

20.4

$

32.2

The bridge loan commitment
fees represent fees paid to lenders to make available to the Company a bridge
loan facility to repurchase the Senior Discount Notes and Senior Subordinated
Notes from the holders of such notes under the terms of the change of control
provisions of the indentures. No notes were tendered under the offer and the
bridge loan was not used. The related commitment fees were charged to interest
expense during the three months ended December 31, 2005.

11

Note 11. Income
Taxes

The Company calculates its
effective tax rate using Accounting Principles Board Opinion No. 28, which
requires that an estimated annual effective tax rate be determined and applied
to the pre-tax income. During the quarter ended December 31, 2006, the
Company determined its annual effective tax rate to be 40.5% based on its
latest earnings projection for 2007. The tax rate for the quarter ended December 31,
2005 was a benefit of 31.9%. The difference between the federal, state, and
foreign statutory tax rates and the effective tax rate is primarily due to
non-deductible interest and the domestic manufacturing deduction.

Note 12.Segment Information

Three months ended
December 31,

2006

2005

(dollars in millions)

Net sales

Mueller Co.

$

167.1

$

180.4

U.S. Pipe

117.4

171.1

Anvil

133.6

132.8

Consolidated eliminations

(6.2

)

(3.9

)

Consolidated

$

411.9

$

480.4

Income (loss) from operations

Mueller Co.

$

35.7

$

(3.8

)

U.S. Pipe

7.2

(27.8

)

Anvil

13.0

(1.5

)

Corporate expense(1)

(6.9

)

(6.4

)

Consolidated

$

49.0

$

(39.5

)

Depreciation and amortization
expense

Mueller Co.

$

12.7

$

12.0

U.S. Pipe

5.5

6.3

Anvil

5.9

5.4

Corporate

0.3

0.1

Consolidated

$

24.4

$

23.8

Capital expenditures

Mueller Co.

$

6.7

$

6.0

U.S. Pipe

7.8

7.4

Anvil

5.1

2.5

Corporate

0.4

0.1

Consolidated

$

20.0

$

16.0

(1)Includes certain expenses not allocated
to segments.

12

Note 13. Commitments
and Contingencies

Income Tax
Litigation

A dispute exists with
regard to federal income taxes for fiscal years 1980 through 1994 allegedly
owed by the Walter consolidated group, which included the U.S. Pipe segment
during these periods. It is estimated that the amount of tax presently claimed
by the Internal Revenue Service is approximately $34.0 million for issues
currently in dispute in bankruptcy court for matters unrelated to the Company.
This amount is subject to interest and penalties. In addition, the IRS has
issued a Notice of Proposed Deficiency assessing additional tax of
$80.4 million for the fiscal years ended May 31, 2000, December 31,
2000, and December 31, 2001. As a matter of law, the Company is jointly
and severally liable for any final tax determination. However, Walter
management has indicated to the Company that they believe that Walters tax
filing positions have substantial merit and that they intend to defend
vigorously any claims asserted. Walter management has further indicated to the
Company that Walter has an accrual that they believe to be sufficient to cover
the estimated probable loss, including interest and penalties. The Company has
concluded the risk of loss to the Company is not probable and accordingly, no
liability has been recorded in the Companys consolidated financial statements.

Environmental
Matters

The Company is subject to a wide variety of laws and
regulations concerning the protection of the environment, both with respect to
the construction and operation of many of its plants and with respect to
remediating environmental conditions that may exist at its own and other
properties. The Company believes that it is in substantial compliance with
federal, state and local environmental laws and regulations. The Company
accrues for environmental expenses resulting from existing conditions that
relate to past operations when the costs are probable and reasonably estimable.

Solutia, Inc and Pharmacia Corporation filed suit
against U.S. Pipe and Walter on January 5, 2003 for contribution and cost
recovery by Solutia with respect to costs incurred and to be incurred by
Solutia in performing remediation of polychlorinated biphenyls (PCBs) and heavy
metals mandated by the Environmental Protection Agency in Anniston, Alabama
under an administrative consent order negotiated with the EPA (an ACO). The
ACO provides protection against contribution claims by third parties, such as
Solutia. The Magistrate has entered an Order staying discovery in this matter
but has allowed Solutia to proceed with on-site sampling discovery. Management
believes that the likelihood of liability in the contribution litigation is
remote.

The Company and its U.S. Pipe subsidiary have been named
in a purported civil class action case originally filed on April 8, 2005
in the Circuit Court of Calhoun County, Alabama, and removed to the U.S.
District Court for the Northern District of Alabama under the Class Action
Fairness Act. The putative plaintiffs in the case filed an amended complaint
with the U.S. District Court on December 15, 2006. The case was filed
against U.S. Pipe and other foundries in the Anniston, Alabama area alleging
state law tort claims (negligence, failure to warn, wantonness, nuisance,
trespass and outrage) arising from creation and disposal of foundry sand
alleged to contain harmful levels of PCBs and other toxins, including arsenic,
cadmium, chromium, lead and zinc. The plaintiffs are seeking damages for real
and personal property damage and for other unspecified personal injury.
Management believes this matter is still in early stages of litigation and no
substantial discovery has taken place. In addition, management believes that
both procedural and substantive defenses would likely be available should this
class action be allowed to proceed. At present, management has no reasonable
basis to form a view with respect to the probability of liability in this
matter.

Although the Company now
produces a small amount of no-lead brass products, most of the Companys brass
valve products contain approximately 5.0% lead. Environmental advocacy groups,
relying on standards established by Californias Proposition 65, are seeking to
eliminate or reduce the content of

13

lead in
water infrastructure products offered for sale in California. Some of the
Companys subsidiaries have entered into settlement agreements with these
environmental advocacy groups to modify products or offer substitutes for sale
in California. Legislation to substantially restrict lead content in water
infrastructure products has been introduced in the United States Congress.
Congress or state jurisdictions other than California may enact legislation
similar to Proposition 65 to restrict the content of lead in water products,
which could require the Company to incur additional capital expenditures to
modify production. The Company undertook a capital project to implement a
no-lead brass production line that required the Company to incur approximately
$8.0 million in incremental capital spending, of which $7.9 million was spent
during the year ended September 30, 2006. Also, the Company began
implementation of a project to consolidate its two existing brass foundries
into one facility that required the Company to incur approximately $11.2
million in incremental spending, of which $5.8 million was spent during the
year ended September 30, 2006. The foundry consolidation project is
expected to be completed during 2007.

Commitments and
ContingenciesOther

As part of the acquisition
on January 15, 2004 of the business of Star Pipe, Inc. (Star),
Anvil has agreed to a future payment to be made to the seller Star to the
extent that the gross profit of the acquired business exceeds a targeted gross
profit. The maximum potential payment amount is $23 million. Management
currently estimates the payment could total approximately $3 million to $6
million for the payment period that began February 1, 2004 and ended January 31,
2007. The payment amount indicated above is based on managements best
estimate, but the actual payment could be materially different. The liability
for such payment will be recorded at the end of the payment period, in
accordance with the purchase agreement, with a corresponding increase to
goodwill.

Note 14. Subsequent
Events

On January 4, 2007, the Company acquired the
assets of Fast Fabricators, Inc., a ductile iron pipe fabricator
headquartered in Bloomfield, Connecticut, for $24.5 million in cash, subject to
adjustments based on working capital settlements and earn-out provisions.

On January 31, 2007, the Company declared a quarterly
dividend of $0.0175 per share of the Companys Series A and Series B
common stock, payable on February 19, 2007 to shareholders of record at
the close of business on February 9, 2007.

14

ITEM 2.MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following
discussion should be read in conjunction with the audited consolidated
financial statements and notes thereto that appear in the Companys Annual Report
filed on Form 10-K and with the condensed consolidated financial
statements that appear elsewhere in this quarterly report. This discussion
contains forward-looking statements reflecting current expectations that
involve risks and uncertainties. Actual results and the timing of events may
differ significantly from those projected in such forward-looking statements
due to a number of factors, including those set forth in the section entitled Risk
Factors in the Companys Annual Report filed on Form 10-K.

The registrant is Mueller Water Products, Inc., a
Delaware corporation (Mueller Water or the Company). The Company is the
surviving corporation of the merger on February 2, 2006 of Mueller Water
Products, LLC (Commission File Number: 333-116590) and Mueller Water
Products Co-Issuer, Inc. with and into Mueller Holding Company, Inc.,
a Delaware corporation. On June 1, 2006, Mueller Water completed its
initial public offering of its Series A common stock (NYSE: MWA). On December 14,
2006, Walter Industries, Inc. (Walter), a diversified New York Stock
Exchange traded company (NYSE: WLT),
distributed all of the Companys outstanding Series B common stock (NYSE:
MWA.B) to Walters shareholders.

On October 3, 2005, through a series of
transactions (the Acquisition), Walter, through a wholly-owned subsidiary,
acquired all outstanding shares of capital stock of Mueller Water Products, Inc.
(Predecessor Mueller), which immediately was converted into Mueller Water
Products, LLC, a Delaware limited liability company and contributed United
States Pipe and Foundry Company, LLC, (U.S. Pipe), owned by Walter since
1969, to the acquired company.

In this report, each of the terms Mueller Water, the
Company, we, us or our refers to Mueller Water Products, Inc. and
its subsidiaries, except where the context makes clear that the reference is
only to Mueller Water Products, Inc. itself, and is not inclusive of its
subsidiaries.

Except as otherwise noted,
we present all financial and operating data on a fiscal year and fiscal quarter
basis. Our fiscal year ends on September 30, and our first fiscal quarter
ends on December 31.

Overview

The Companys net
income for the three months ended December 31, 2006 was $17.0 million, or
$0.15 per diluted share, which compares to a net loss in the prior year period
of $48.8 million, or a loss of $0.57 per diluted share. The principal factors
impacting the current period results compared to the prior year period
included:

·On
October 26, 2005 the Company announced that the U.S. Pipe Chattanooga
plant would be closed during fiscal 2006 and that production of the U.S. Pipe
valves and hydrants would be transferred to the Mueller Co. manufacturing
facilities at Albertville, Alabama and Chattanooga, Tennessee. Related plant closure
costs were $40.0 million of pre-tax charges in the fiscal 2006 period.

·Revenues
declined 14% in the current period, related primarily to a decline in the
housing market, partially offset by higher pricing. According to U.S. Census
Bureau data, housing starts per month have trended downward since January 2006.
Housing starts for December 2006 declined 23% compared to the peak month
of the prior year quarter.

·The
U.S. Pipe segment net sales for the first quarter of fiscal 2006 includes
approximately $30 million of sales from ductile iron pipe that was substituted
for PVC pipe as a result of Hurricane Katrina.

15

·Net
cash proceeds received from the initial public offering in June 2006 were
used to pay down debt, thereby reducing interest expense in subsequent periods.

·Cost
of sales in the prior year period included $58.4 million relating to the
effects of valuing the inventory of the Mueller Co. and Anvil segments acquired
in the Acquisition at fair value.

Management has
identified the following significant developments, trends and factors that may
impact our future results:

·In
December 2006, the Company announced a 5% price increase in valves and
hydrants and an 8% increase in brass service products that were effective in
February 2007. In November 2006, the Company announced an increase in
ductile iron pipe selling prices effective January 2007 of approximately
4%.

·The
dollar value of bookings for water infrastructure products decreased in the
first quarter of fiscal 2007 over prior year, but the largest declines occurred
in the early part of the quarter. January 2007 bookings increased over the
comparable prior year period. This trend may reflect that distributors have
worked through an inventory build-up that resulted from price increases the
Company announced in the May/June 2006 timeframe and exacerbated by the
continued decline in housing starts.

·Management
believes the Company will benefit from projected spending increases in the
repair and replacement market as the construction season begins. The American
Water Works Association forecasts that project repair and replacement spending
will grow 11% in 2007. The Companys U.S. Pipe public works quotation activity
increased 10% during the first quarter of fiscal 2007.

·Subsequent
to the spinoff of the Company from Walter, the Company will no longer be
subject to corporate expense allocations from Walter. Such charges totaled $1.6
million for the quarter ended December 31, 2006. However, the Companys
corporate segment expenses are expected to increase as the Company provides
certain services previously provided by Walter. The corporate segment is
expected to incur increased expenses in the future, primarily employee-related
costs, as staffing levels are increased to replace the functionality previously
provided by Walter.

·The
Companys synergy plan has an annual operating income improvement run rate of
$41 million as of December 31, 2006 and is expected to be at the high end
of a $40 million to $50 million annual range by early 2008. Significant volume
or price declines may impede the Companys ability to maintain or exceed its
current synergy run rates.

·The
Company has historically implemented price increases to alleviate rising raw
material costs, and in certain market conditions, these increases may not be
sustained.

·During fiscal 2006, brass
ingot costs rose from $1.60 per pound to over $3.00 per pound. Brass ingot
costs decreased from that high level during the current quarter.

Forward-Looking
Statements

This report contains
certain statements that may be deemed forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934. All
statements, other than statements of historical fact, that address activities,
events or developments that we or our management intends, expects, projects,
believes or anticipates will or may occur in the future are forward-looking
statements. Such statements are based upon certain assumptions and assessments
made by our management in light of their experience and their perception of
historical trends, current conditions, expected future developments and other
factors they believe to be appropriate. The forward-looking statements included
in this report are also subject to a number of material risks and
uncertainties, including but not limited to economic,

16

competitive,
governmental and technological factors affecting our operations, markets,
products, services and prices. Such forward-looking statements are not
guarantees of future performance, and actual results, developments and business
decisions may differ from those envisaged by such forward-looking statements.

Results of
Operations

Three Months Ended
December 31, 2006 as Compared to the Three Months Ended December 31,
2005

Three months ended December 31,

2006

2005

FY07 Q1 vs. FY06 Q1

Percentage
of net
sales(1)

Percentage
of net
sales(1)

Increase/
(decrease)

Percentage
increase/
(decrease)

(dollars in millions)

Net sales

Mueller Co.

$

162.1

39.3

%

$

176.7

36.8

%

$

(14.6

)

(8.3

)%

U.S. Pipe

116.4

28.3

171.1

35.6

(54.7

)

(32.0

)

Anvil

133.4

32.4

132.6

27.6

0.8

0.6

Consolidated

$

411.9

100.0

$

480.4

100.0

$

(68.5

)

(14.3

)

Gross profit

Mueller Co.

$

55.1

34.0

$

15.5

8.8

$

39.6

255.5

U.S. Pipe

16.8

14.4

9.1

5.3

7.7

84.6

Anvil

35.8

26.8

18.9

14.3

16.9

89.4

Consolidated

$

107.7

26.1

$

43.5

9.1

$

64.2

147.6

Selling, general and
administrative

Mueller Co.

$

19.4

12.0

$

19.3

10.9

$

0.1

0.5

U.S. Pipe

8.0

6.9

11.0

6.4

(3.0

)

(27.3

)

Anvil

22.8

17.1

20.4

15.4

2.4

11.8

Corporate

6.9

1.7

6.4

1.3

0.5

7.8

Consolidated

$

57.1

13.9

$

57.1

11.9

$

0.0



Related party corporate
charges

U.S. Pipe

$

1.6

1.4

$

1.8

1.1

$

(0.2

)

(11.1

)

Consolidated

$

1.6

0.4

$

1.8

0.4

$

(0.2

)

(11.1

)

Facility
rationalization, restructuring and related costs

U.S. Pipe

$





$

24.1

14.1

$

(24.1

)

(100.0

)

Consolidated

$





$

24.1

5.0

$

(24.1

)

(100.0

)

Income (loss) from
operations

Mueller Co.

$

35.7

22.0

$

(3.8

)

(2.2

)

$

39.5

1,039.5

U.S. Pipe

7.2

6.2

(27.8

)

(16.2

)

35.0

125.9

Anvil

13.0

9.7

(1.5

)

(1.1

)

14.5

966.7

Corporate

(6.9

)

(1.7

)

(6.4

)

(1.3

)

(0.5

)

(7.8

)

Consolidated

49.0

11.9

(39.5

)

(8.2

)

88.5

224.1

Interest expense,
net of interest income

20.4

5.0

32.2

6.7

(11.8

)

(36.6

)

Income (loss)
before income taxes

28.6

6.9

(71.7

)

(14.9

)

100.3

139.9

Income tax expense
(benefit)

11.6

2.8

(22.9

)

(4.8

)

34.5

150.7

Net income (loss)

$

17.0

4.1

$

(48.8

)

(10.2

)

$

65.8

134.8

(1)Percentages are by segment, if
applicable.

17

Consolidated
Analysis

Net
Sales.Consolidated
net sales for the three months ended December 31, 2006 were $411.9 million,
a decrease of $68.5 million, or 14.3%, from $480.4 million in the
prior year period. This decrease was primarily due to a decline in the housing
market, partially offset by higher pricing. In addition, sales in the prior
year quarter includes approximately $30 million of ductile iron pipe sales
associated with Hurricane Katrina.

Gross
Profit.Consolidated
gross profit for the three months ended December 31, 2006 was $107.7
million, an increase of $64.2 million, compared to $43.5 million in the prior year
period. Gross margin increased to 26.1% in the current period compared to 9.1%
in the prior year period. Cost of sales for the three months ended December 31,
2005 includes $58.4 million of purchase accounting adjustments related to
valuing inventory acquired in the Acquisition at fair value. Excluding the
impact of this adjustment, gross margin would have been 21.2%. The improvement
in gross profit is primarily due to plant cost reductions and efficiencies
achieved by our synergy plan.

Selling,
General & Administrative.Consolidated expenses for the three
months ended December 31, 2006 and 2005 were $57.1 million. Expenses as a
percentage of net sales increased to 13.9% in the current period compared to
11.9% in the prior year period. This percentage increase is due to lower sales
in the current period.

Related
Party Corporate Charges. Certain costs incurred
by Walter such as insurance, executive salaries, professional service fees,
human resources, transportation, and other centralized business functions are
allocated to its subsidiaries. Costs incurred by Walter that cannot be directly
attributed to its subsidiaries are allocated to them based on estimated annual
revenues. These charges are recorded in the U.S. Pipe segment.

Facility
Rationalization, Restructuring and Related Costs. The
Company expensed $24.1 million of restructuring costs for the three months
ended December 31, 2005 related to the closure of the U.S. Pipe
Chattanooga, Tennessee valve and hydrant plant.

Interest
Expense, Net of Interest Income. Interest
expense, net of interest income for the current period was $20.4 million,
compared to $32.2 million in the prior year period. Net cash proceeds received
from the initial public offering in June 2006 were used to pay down debt,
resulting in lower interest expense in the current period. The prior year
period includes $2.5 million of expenses from bridge loan commitment fees
incurred as a result of the Acquisition.

Income Tax Expense
(Benefit). Income tax expense for the current
period was $11.6 million as compared to a benefit of $22.9 million in
the prior year period. The effective tax rate for the first fiscal quarter of
2007 was 40.5%. The effective tax rate for the first fiscal quarter 2006 was a
benefit of 31.9%.

Segment
Analysis

Mueller Co.

Mueller Co. segment net sales for the three months
ended December 31, 2006 were $162.1 million, a decrease of $14.6 million,
or 8.3% from $176.7 million in the prior period. This decline is primarily due
to lower volumes, partially offset by approximately $11 million of net price
increases implemented during fiscal year 2006. Valve and hydrant shipments for
the three months ended December 31, 2006 were 15% lower than in the prior
year period as a result of the slow housing market. Additionally, the segment
had a stronger product mix in the prior year period, driven primarily by a
municipal water district project. The current period also includes the revenue
from the transfer of the U.S. Pipe hydrant and valve product lines.

Mueller Co. segment gross profit for the three months
ended December 31, 2006 was $55.1 million, an increase of $39.6 million
compared to $15.5 million in the prior year period. Gross margin increased to

18

34.0% in the current
period compared to 8.8% in the prior year period. Included in cost of sales for
the three months ended December 31, 2005 was $46.2 million of purchase
accounting adjustments related to valuing inventory acquired in the Acquisition
at fair value. Excluding the impact of these adjustments, gross margins would
have been 34.9%.

Mueller Co. segment
operating income for the three months ended December 31, 2006 was $35.7
million, an increase of $39.5 million compared to an operating loss of $3.8
million in the prior year period. Excluding $46.2 million of purchase
accounting adjustments discussed above, operating income declined primarily due
to lower valve and hydrant volumes.

U.S. Pipe

U.S. Pipe segment net sales for the three months ended
December 31, 2006 were $116.4 million, a decrease of $54.7 million, or
32.0% from $171.1 million in the prior year period. The prior period includes
approximately $30 million of sales from ductile iron pipe that was substituted
for PVC pipe as a result of Hurricane Katrina. The prior period also includes
approximately $14 million of sales from valves and hydrants manufactured at the
U.S. Pipe Chattanooga plant that were transferred to the Mueller Co. segment on
January 1, 2006. U.S. Pipe also experienced a decline in volume of
approximately $20 million attributed primarily to declines in housing starts
during the current period. These declines in volume were partially offset by
the effect of sales price increases of approximately $11 million and an
improved product mix.

U.S. Pipe segment gross profit for the three months
ended December 31, 2006 was $16.8 million, an increase of $7.7 million, or
84.6%, compared to $9.1 million in the prior year period. Gross margin
increased to 14.4% in the current period compared to 5.3% in the prior year
period. The prior year period includes inventory write-offs of $10.7 million in
connection with the U.S. Pipe Chattanooga plant closure. In addition, because of
the plant closure process, prior period actual production capacity at the U.S.
Pipe Chattanooga facility was significantly lower than normal capacity,
resulting in facility expenses of $5.2 million charged directly to cost of
sales. Excluding these prior year charges for closing the U.S. Pipe Chattanooga
plant, gross margins were comparable in each period.

U.S. Pipe segment
operating income for the three months ended December 31, 2006 was $7.2
million, an increase of $35.0 million from an operating loss of $27.8 million
in the prior year period. The prior year period includes $24.1 million of
Chattanooga restructuring costs and $15.9 million of other closure costs
described above.

Anvil

Anvil segment net sales for the three months ended December 31,
2006 were $33.4 million an increase of $0.8 million, or 0.6% from $132.6
million in the prior year period. The effects of Anvils price increases in the
prior year were partially offset by declines in volume.

Anvil segment gross profit for the three months ended December 31,
2006 was $35.8 million, an increase of $16.9 million, or 89.4%, compared to
$18.9 million in the prior period. Gross margin increased to 26.8% in the
current period compared to 14.3% in the prior year period. Excluding $12.2
million of prior year purchase accounting adjustments related to valuing
inventory acquired in the Acquisition at fair value, gross margin in the prior
year would have been 23.5%. Gross margin improvement in the current period is
primarily due to improved pricing.

Anvil segment operating
income for the three months ended December 31, 2006 was $13.0 million, an
increase of $14.5 million from an operating loss of $1.5 million in the prior
year period. This increase is primarily related to the $12.2 million of prior
year purchase accounting adjustments discussed above and

19

$1.2
million from dumping duties received from the federal government and included
in selling, general, and administrative expenses in the current quarter.

Financial Condition

Cash and cash equivalents decreased from $81.4 million
at September 30, 2006 to $71.5 million at December 31, 2006,
reflecting $20.0 million in cash flows used in investing activities, and $14.2
million in cash flows used in financing activities, offset by $23.9 million in
cash flows provided by operations and $0.4 million in cash flows provided by
the effect of exchange rate changes on cash.

Accounts receivable were $252.2 million at December 31,
2006, a decrease of $70.7 million from September 30, 2006. The decrease in
accounts receivable is due to both the seasonality of the business and lower
volumes in the first quarter of fiscal 2007 resulting from the decline in the
housing market.

Accounts payable were $91.7 million at December 31,
2006, a decrease of $38.2 million from September 30, 2006. The decrease in
accounts payable reflects the seasonality of the business.

Accrued expenses were
$92.6 million at December 31, 2006, a decrease of $23.7 million compared
to September 30, 2006. The decrease in accrued liabilities is primarily
due to payments of employee related liabilities and interest and to a reduction
of an environmental claims liability.

Statement of Cash
Flows

Historically, our financing requirements have been
funded primarily through cash generated by operating activities and borrowings
under our revolving credit facility. From time to time, Predecessor Mueller
also raised additional funds through term debt offerings.

Operating
activities.Net
cash provided by operations was $23.9 million for the first three months of
fiscal 2007, compared to net cash provided of $74.9 million for the first
three months of fiscal 2006.

Investing
activities.In
the first three months of fiscal 2007 we had net cash used in investing
activities of $20.0 million compared to net cash used in the first three months
of fiscal 2006 of $36.0 million.

Financing activities.Net cash used by financing
activities was $14.2 million for the first three months of fiscal 2007,
compared to net cash provided in the first three months of fiscal 2006 of
$33.5 million.

Liquidity and
Capital Resources

The 2005 Mueller Credit Agreement contains
restrictions on our ability to make capital expenditures. Based on current
estimates, management believes that the amount of capital expenditures
permitted to be made under the senior credit facility will be adequate to
maintain the properties and business of our continuing operations.

The Companys long-term
debt instruments include certain debt covenants, including maintenance of
defined financial ratios. The Company is in compliance with all applicable debt
covenants as of December 31, 2006 and anticipates maintaining such
compliance.

Letters of Credit
and Surety Bonds

We
utilize letters of credit and surety bonds in the ordinary course of business
to ensure our performance of contractual obligations. As of December 31,
2006, we had $33.2 million of letters of credit and $14.8 million of
surety bonds outstanding. These items are not recorded on the Condensed Consolidated Balance Sheet. Outstanding
letters of credit reduce the amount available for borrowing under the 2005
Mueller Revolving Credit Facility.

20

ITEM 3.QUALITATIVE
AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK

Interest
Rate SwapsThe Company uses interest rate swap
contracts with a cumulative total notional amount of $425 million to hedge
against cash-flow variability arising from changes in LIBOR rates in
conjunction with its LIBOR-indexed variable rate borrowings. The Company
recorded an unrealized gain from its swap contracts, net of tax, of $0.9
million at December 31, 2006 in accumulated other comprehensive income. These
swaps have a fair value of $1.5 million at December 31, 2006, which is
included in other long-term assets in the accompanying Condensed Consolidated Balance
Sheet.

Forward
Foreign Currency Exchange ContractsThe Company uses
Canadian dollar forward exchange contracts with a cumulative notional amount of
$29.4 million to hedge against cash-flow variability arising from changes in
the Canadian dollar-U.S. dollar exchange rate in connection with anticipated
transactions, primarily inventory purchases denominated in Canadian dollars. These
forwards have a fair value of $0.7 million at December 31, 2006, which is
included in other long-term assets in the accompanying Condensed Consolidated Balance
Sheet.

Natural Gas SwapsThe Company uses
natural gas swap contracts with a cumulative total notional amount of approximately
600,000 mmbtu to hedge against cash-flow variability arising from changes in
natural gas prices on the NYMEX exchange in conjunction with its anticipated
purchases of natural gas. The Company recorded an unrealized loss from its swap
contracts, net of tax, of $0.3 million at December 31, 2006 in accumulated
other comprehensive income. These swaps have a negative fair value of $0.6
million at December 31, 2006, which is included in other liabilities in
the accompanying Condensed Consolidated Balance Sheet.

On January 8, 2007,
the Company entered into additional natural gas swap contracts. These contracts
fix the Companys purchase price for natural gas at prices ranging from $6.67
to $7.10 per mmbtu for a total purchased volume of approximately 300,000 mmbtu over the eight months ending September 30,
2007.

ITEM 4.CONTROLS
AND PROCEDURES

There have been no
significant changes in our internal procedures that significantly affected, or
are reasonably likely to affect, our disclosure controls during the three
months ended December 31, 2006.

PART II. OTHER
INFORMATION

ITEM 1.Legal
Proceedings

Refer to the information
provided in Note 13 to the Notes to Condensed Consolidated Financial Statements
presented in Item 1 of Part I of this quarterly report.

Amendment, dated as of
March 2, 2006, to Executive Employment Agreement dated September 9,
2005 between Walter Industries, Inc. and Gregory E. Hyland. Incorporated
by reference to Exhibit 10.1 to Mueller Water Products, Inc.
Form 8-K (File no. 333-131521) filed on
March 3, 2006.

21

10.10.2*

Assignment and Assumption Agreement dated
December 14, 2006 between Walter Industries, Inc. and Mueller Water
Products, Inc. relating to the September 9, 2005 employment
agreement of Gregory E. Hyland. Incorporated by reference to
Exhibit 10.1 to Mueller Water Products, Inc. Form 8-K
(File no. 001-32892) filed on December 15, 2006.

10.15.1*

Assignment and
Assumption Agreement dated December 14, 2006 between Walter Industries, Inc.
and Mueller Water Products, Inc. relating to the July 12, 2004
employment agreement of Raymond P. Torok. Incorporated by reference to
Exhibit 10.2 to Mueller Water Products, Inc. Form 8-K
(File no. 001-32892) filed on December 19, 2006.